Investor, Save Thyself: How Not to Kneecap Your Retirement

Photograph by Melissa Scheetz/Getty Images Close

Photograph by Melissa Scheetz/Getty Images

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Photograph by Melissa Scheetz/Getty Images

Federal Reserve Chairman Ben Bernanke's policy of keeping interest rates as low as possible is supposed to encourage Americans to spend and to invest in riskier assets such as stocks.

The public response after almost five years of that? We'll keep our cash, thank you, according to a survey of consumers by Bankrate.com, which tracks interest rates and mortgages. More than one-quarter of the 1,005 adults surveyed favor cash for long-term investing, defined by Bankrate as money not needed for more than 10 years. When Bankrate.com asked back in April (when the one-month gain in the Standard & Poor's 500 Index was 13.4 percent) if people were more inclined to invest in the market, a whopping 76 percent said no.

That fact, along with recent surveys showing that those who take out 401(k) loans generally save less than those who don't, makes one thing very clear: Sometimes, we badly need to save ourselves from our bad savings habits. Overly conservative investing and poor saving habits have huge consequences down the line.

Hunkering Down

Given current savings rates -- money market rates are 0.11 percent on average -- keeping money in cash is like watching your money shrink a little bit every day, due to inflation.

“Americans are woefully undersaved for retirement," says Greg McBride, Bankrate.com's senior financial analyst. The way McBride sees it, with the decline in traditional company-funded pensions and uncertainty about social security, the burden is increasingly on ourselves to provide for our own retirement. A related survey from Bankrate.com reports that only 18 percent of working Americans are saving more for retirement now than they were a year ago.

Many are still recovering from the shock of seeing the S&P 500 drop 38 percent in 2008, only to come roaring back. (It's gained 136 percent from the market bottom in March 2009 through July 31, according to Bloomberg data.) That kind of volatility tends to scare off many retail investors who can't afford -- financially and/or emotionally -- to see their nest eggs take that kind of a beating.

Savings Sabotage

If that's not enough to keep the Social Security Commissioner awake at night, insurer New York Life reports that 401(k) plan participants who take out loans from their account may be sabotaging their retirement savings. Those who take loans are more likely to save at a lower contribution rate than those who don't take such loans, and are not likely to repay the loan when leaving their employer. If a loan isn't paid back, generally within 30 to 90 days, depending on the plan, and the ex-employee is under age 59 1/2, that loan will be considered a withdrawal, subject to tax and a 10 percent IRS penalty.

The average American worker in a New York Life 401(k) plan is 43, earns $68,700 annually, contributes 6.25 percent of salary into the 401(k) and has an account balance of $55,270. The company administers more than 1,750 plans, representing 1.15 million American workers.

The New York Times offers a related take on the 401(k) loan issue. Citing a Fidelity study, the paper reported that folks who take a single 401(k) loan are much more likely to become serial borrowers. Constantly raiding this cookie jar won’t make you fat, but it will make you poorer.

A possible solution? Whenever possible, make saving a priority, McBride says. "Pay yourself first,'' he says. "Get that money to work for you right away.''

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